What is the best home loan for bad credit?
Just because you have a low credit score (sometimes referred to as bad credit) doesn’t mean you’ll miss your opportunity to own a home one day. There are a few steps you can take to get a home loan.
What is bad credit?
In Australia, bad credit is often associated with a low credit score. Your credit score is a number lenders use to assess the risk of lending you money. You can find out what your credit score is for free by visiting Get Credit Score.
When it comes to applying for and taking out a home loan, your credit score will help a lender determine the amount of the loan and the interest rate. It’s a numerical figure that represents how likely you are to pay off loans, credit cards and utilities. But it can also impact your ability to take out a home loan in the future.
Getting a home loan with bad credit
If you’re applying for a home loan with bad credit, there are a few options to consider:
· Saving a deposit: Saving a deposit that’s more than 20% of the property’s value will help convince your lender of the limited risk you pose as a borrower.
· Comparing your options: To ensure you get a mortgage that suits your situation, carefully compare home loans before making a decision.
· Specialist lenders: There are specialist lenders who will carefully consider your application and credit history, as opposed to allowing a computer program to give you the green light.
Associated risks of applying for a home loan with bad credit
There a few risks associated with taking out a home loan:
· Small loan amounts: You might not be able to borrow as much as you’d like. This means you’ll need to reconsider your budget, or save a bigger deposit.
· High interest rates: Your lender might approve your loan with a high interest rate. This will impact your repayments and the amount of interest you pay over the life of the loan. Plan your budget carefully to ensure you are able to afford your repayments.
· Lenders mortgage insurance (LMI): LMI is a fee lenders charge to protect themselves against the risk of loans not being repaid. With bad credit, the risk of loaning you money is high, and therefore a fee for LMI is usually included.
· Damaging your credit score: Your credit report will include all references to any loans or credit cards you have applied for in the past five years. Applying and being rejected for a loan will go on your credit report, which will be taken into account in determining your credit score.
To avoid these risks, consider improving your credit score before applying for a home loan. You can do this by:
· Paying off as much of your debt as possible
· Maintaining a steady income
· Not taking out any other loans or credit cards
· Paying your bills on time (i.e. phone and utilities)